Latin America
Best bank: Citigroup Best debt underwriter: Morgan Stanley Dean Witter Best M&A firm: Merrill Lynch Best securities firm: Santander Investment
It’s been a dull year for commercial banks across the region but an exciting time for cross-border activity. These two trends are not unrelated. As economies stumble and domestic banks feel the backwash, long-term investors in Latin America see it as an opportune moment to strike a deal.
Merrill Lynch, which wins the award for best M&A firm in Latin America, has advised on a number of the most interesting deals including the acquisition by Spanish oil company Repsol of the remaining 85.01% of YPF, the Argentine oil company, that it doesn’t already own. Merrill also advised Spanish company Endesa in its successful battle to control Chilean utility Enersis and French steel company Usinor in its purchase of controlling stakes in Brazilian steel companies Acesita and CST.
What these deals all have in common is that foreigners now own strategic firms in Latin America, an idea which would have been unthinkable just a few years ago. In the cases of YPF and Enersis, the element of contest brought a new dimension to Latin M&A which had previously been a gentlemanly affair.
“It really marks a sea change in Latin America,” says Roger Ullman, head of Latin American M&A for Merrill. “This is a region where only a few years ago every natural resource company was controlled by government. When we helped privatize YPF in 1993 it was inconceivable for it to be sold to a foreigner. The real significance of this transaction is the change in the politics and psychology in Argentina.”
According to Thomson Financial Securities Data, Merrill is the first placed house for Latin M&A deals in 1999 up to May 27 with eight deals valued at $21.5 billion. Goldman, which also advised on the Repsol deal, is in second place with three deals with a total value of $20.6 billion. Last year the ranking was Salomon, Morgan Stanley, Lehman, Deutsche, JP Morgan, with Merrill in sixth place.
The Repsol/YPF deal is being touted as “the most important M&A deal in the history of Latin America” by some observers. But in some ways the Endesa deal is even more unusual. At the outset, Endesa already had a 32% stake and three out of seven board directors and believed it was in control. But the management had other ideas and upset Endesa with its plans to sell off Enersis’s principal generating subsidiary. A two-pronged battle then developed, first to take additional equity in Enersis and then to take control of the subsidiary, confusingly called Endesa Chile, for which Duke Energy of the US had started to pitch.
In the international capital markets also there have been some roller-coaster rides, with markets closing down after the Russian and Brazilian crises. It required some careful planning and innovation to reopen them. For some while now Morgan Stanley has forged itself a dominating position in Latin American issuance especially on the sovereign side.
According to Capital Data Bondware, Morgan Stanley was bookrunner for 15 deals worth $5.1 billion giving it a 20% market share in 1998. JP Morgan came second with 16 issues worth $3.5 billion and a 13.3% share. In the first five months of 1999 Goldman Sachs is out front with nine issues worth $3.2 billion and a 21% share helped along by five deals for PDVSA (Petróleos de Venezuela). JP Morgan, Salomon Smith Barney and Morgan Stanley all have roughly equal shares of 13% so far this year.
But it was the market reopenings that set Morgan Stanley apart with two deals for Argentina. With the market closed since July 29, Morgan used a step-down structure to bring Argentina back in late October. The Dm500 million ($270 million) 10-year puttable senior step-down notes had a 14% coupon for the first two years followed by 9%. They are puttable after five years. The issue was placed 72% with European retail investors providing an important vote of confidence for emerging-market issues in the pipeline.
Then on February 4 of this year Morgan Stanley brought Argentina to the market in the first ever euro issue for a non-investment-grade emerging-market borrower. The e350 million 10-year step-down notes came with a coupon of 15% in the first two years and then 8%. The transaction marked the reopening of the Latin sovereign issuance market after its virtual shut-down in the wake of the Brazilian devaluation.
But on the home front things have been bleak. Falling commodity prices have hit the region’s exports and downward pressure on currencies has jacked up interest rates. The resulting credit squeeze has hit corporates and banks, revealing long-running flaws in economies. Ecuador’s banking system narrowly avoided collapse earlier this year, Argentina’s currency board is once again being tested and Colombia is facing deep recession.
Foreign banks which have taken over domestic Latin banks are finding the going particularly hard. Their acquisitions have a lot of inherited bad debts which have to be provided for just as other parts of the portfolio are going sour. Last year’s story, that BBV and Banco Santander Central Hispano will take longer than anticipated to get to grips with their new purchases, remains valid – much to the frustration of their shareholders. In these difficult times, the better capitalized banks that are not undergoing merger trauma are often doing better than their now foreign-owned rivals.
When the Spanish banks get a real grip, though, things could change. Among banks that can be regarded as wholly foreign and which did not make a major acquisition to enter the market, Citigroup remains the unchallenged leader. Across a range of services it is the first name mentioned by corporate clients in many Latin America countries. It too has taken advantage of opportunities to expand by acquisition and has made purchases of banks in Chile, Argentina and Mexico. Citigroups’s total loans across the region rose from $22 billion in 1997 to $28 billion in 1998 and deposits from $22 billion to $27 billion.
On the investment-banking side few independent domestic houses remain. Among international firms, Santander Investment stands out as one of the few houses with genuine on-the-ground research capability in almost every country. Brian Caplen
Argentina
Best bank: Banco de Galicia
Best foreign bank: Citigroup
BBV Francés and Banco Río de la Plata may be chasing Banco de Galicia in their attempts to be more efficient but they have yet to catch up. Galicia’s great advantage is that it started expanding early when times were better and so was better prepared for the current economic downturn. In the first quarter Galicia’s return on equity was 12.8% compared with 9% for Francés and 6.7% for Río de la Plata. Galicia is Argentina’s largest universal bank with assets of $14 billion and the size and depth of its branch network – it has 274 branches – gives it an edge over competitors.
Factors in favour of its continued strength are a 12.5% stake in a 30-year concession to run the Argentine post office, allowing it use of post offices for automated banking services, and a contract with Shell to put ATMs in gas stations. Argentine banks have never had large market shares but Galicia’s is now close to 9%.
Bolivia
Best bank: Banco Santa Cruz
Highly commended: Banco Unión
Best foreign bank: Citigroup
With the largest franchise and the backing of its Spanish owner, BSCH, Banco Santa Cruz remains the Bolivian winner. It is a universal bank and quite aggressive by local standards with an impressive build up of ATMs. With $790 million in deposits at the end of 1998, Santa Cruz was almost twice the size of its nearest competitor. But Santa Cruz may not always have things its own way. The challenge for all Bolivia’s leading banks is to move from almost total dependence on interest income to fees. The banks that achieve this quickest and most effectively will gain an advantage.
Brazil
Best bank: Banco Itaú
Highly commended: Banco Bradesco
Best securities firm: Banco Bozano Simonsen
Best foreign bank: JP Morgan
Top Brazilian banks did more than get through January’s devaluation, they came out ahead with their long dollar positions. Itaú, which as last year wins our award for best bank, had a positive mismatch of R2.3 billion (now worth $1.3 billion) on the asset side of the balance sheet. At the same time the impact of the devaluation on the loan portfolio is likely to be limited because of the bank’s cautious lending policy and the fact that the ensuing recession has proved less serious than expected. Itaú’s return on equity reached 18.6% in the first quarter, one of the highest in Latin America. The bank has a strong franchise in Brazil and is engaged in universal banking, leasing, brokerage, fund management and insurance. On the capital markets side it has a joint venture with Bankers Trust.
But Itaú cannot afford to rest on its laurels. Analysts are expecting great things of Banco Bradesco‘s new president Márcio Cypriano, only the third since the bank was founded in 1943. Cypriano is expected to seize opportunities quicker than his predecessor Lázaro de Mello Brandão who is now chairman. Bradesco is Brazil’s largest private-sector bank and reaches much further down the spectrum than Itaú in terms of retail and corporate customers.
In the domestic securities business there are few independent players left. Banco Bozano Simonsen stands out as the great survivor which, with the purchase of Meridional in early 1998, now also has a strong retail presence in the south of the country. JP Morgan was the top M&A house in Brazil in 1998 with 10 deals worth $2.1 billion followed by Santander Investment with five deals worth $1.5 billion.
Chile
Best bank: Banco de Chile
Best foreign bank: Citigroup
Merger mania lives on in Chile and has yet to run its full course. The outcome of the Santander-Banco Central Hispano merger is that in Chile BSCH now owns the two largest Chilean banks, Banco Santiago and Banco Santander Chile. There is talk of a further merger between these two which would result in a bank with roughly a 28% share of loans and assets, but the Chilean authorities have made it clear they want to see one of the banks sold. Meanwhile, Banco de Edwards is known to be up for sale and an ownership change is expected in the next 12 to 18 months.
Amidst all this upheaval Banco de Chile seems like an oasis of stability with a clear controlling shareholder group following the pact among Grupo Penta, Juan Cuneo and Alfredo Moreno signed in November 1998, although a strategic alliance with a foreign bank is still likely. While leading Chilean banks are similar in terms of service quality, Banco de Chile continues to stand out in terms of return on equity. With about 11% of the banking system’s loans the bank earns 21% of the system’s profits.
Colombia
Best bank: Bancolombia
Foreign bank: Citigroup
Facing the threat of foreign competition, Colombia’s remaining independents moved fast. In early 1998 Medellín-based BIC took over Banco de Colombia to form Bancolombia, now Colombia’s largest bank with a 15% share of deposits. What’s more, Bancolombia seems to have suffered little from the traumas usually brought on by mergers and so wins our award this year in place of BBV Ganadero.
The Colombian financial sector is highly troubled with a systemic capital deficit of $3.7 billion (4.7% of GDP), which could rise to 10% of GDP, according to research by Santander.
Bancolombia has benefited from a flight to quality with strong acceptance of its new brand and it is the best positioned of the major banks to withstand potential asset quality problems. BC
Costa Rica
Best bank: Banco de San José
Best foreign bank: Scotiabank
Although Costa Rica is home to some of the largest banks in Central America, its banking sector is underdeveloped, undercapitalized and inefficient. The largest banks are state-owned and their assets consist, for the most part, of government debt securities. Although these banks no longer have the monopoly on most sectors of the financial market they enjoyed for many years, the regulatory environment continues to favour them over privately-owned banks.
The state-owned banks are badly run for the most part and analysts are sceptical of the quality of their assets. Of the three big state-owned banks, the smallest, Banco de Costa Rica, is widely regarded as the least unstable and would probably be first in the queue to be privatized – although this is unlikely to happen for some time.
Although the private banking sector has grown rapidly in recent years following relaxation of the state monopoly on banking, it remains small. Only three banks have assets of more than $100 million and most are much smaller. One of the three, Banex, was bought by Panama’s Banco del Istmo in May. The second, Banco Interfín, is a well regarded smaller bank with a strong presence in the corporate lending market.
The biggest private bank, however, with assets of $208 million at the end of 1998, is Banco de San José. It is much better capitalized than the state-owned banks: its total capital accounts for nearly 10% of assets, compared to 5% or 6% for the state-owned institutions.
Banco de San José is part of one of the few truly pan-Central American financial groups. Its parent company, Nicaragua-based BAC International, also owns Credomatic, a regional consumer finance company, and a Nicaraguan bank, Banco de América Central. The group has an investment-grade rating from Thomson BankWatch – a reflection of its strong capitalization, its access to dollar earnings and the good currency match between its assets and liabilities.
The two biggest foreign participants in the Costa Rican banking sector are Scotiabank and Citigroup. Scotiabank operates a retail business and it has also built a strong presence in corporate lending and corporate finance. It has been involved in financing some of the largest construction projects of recent years, including the Firestone tyre plant, one of the largest recent foreign investments in Costa Rica. Citigroup has a lower profile in Costa Rica than in most other countries in Central America. Michael Peterson
Ecuador
Best bank: Banco Popular
Best foreign bank: Citigroup
Ecuador’s banking system is in such bad shape that there is a case for excluding the country from this year’s awards for excellence altogether. In March a major run on the banks was only prevented by freezing deposits. Then in May the Colombian authorities placed under liquidation two Ecuadorean-owned banks because of doubts about their parents’ capacity to support them. These were Banco del Pacífico Colombia, owned by Banco del Pacífico Ecuador, and Banco Andino which is wholly-owned by Ceval, the controlling shareholder of Ecuador’s Banco del Pacífico.
Following this, the state-controlled Ecuadorian bank, Filanbanco, granted a 90 day subordinated credit of about $14 million to Banco del Pacífico, secured by ordinary shares, in anticipation of a future capital increase by Pacífico’s current shareholders. “The latest developments, tantamount to intervention of Pacífico by the government controlled Filanbanco, raise further doubts about the proposed merger between Popular and Pacifico,” says a Thomson BankWatch report.
Despite all this, Banco Popular gets the award for “remaining the strongest among the largest banks” to quote one analyst. Credit procedures are conservative and the income stream is well diversified. Looking ahead there should be opportunities to participate in privatizations and new infrastructure projects resulting from El Niño’s destruction. But Popular cannot escape entirely the cloud that hangs over the whole system. BC
El Salvador
Best bank: Banco Cuscatlán
Highly commended: Banco Agrícola Comercial
Best foreign bank: Citigroup
El Salvador’s banking sector is much stronger than those of the rest of Central America (excluding Panama), but its banks remain small by international standards. Their accounts continue to lack transparency and they are highly leveraged institutions. Although El Salvador is overbanked, business is concentrated in the hands of only a few players and consolidation is steadily reducing the number of smaller institutions.
The country’s two biggest banks, Banco Cuscatlán and Banco Agrícola Comercial, are of a very similar size in terms of both capital and assets. Agrícola is slightly the larger, but Cuscatlán has a clearer strategy and is more innovative in a number of respects.
As its name suggests, Agrícola has a strong franchise among El Salvador’s agricultural producers, especially coffee exporters, and a strong position in trade finance. Banco Cuscatlán’s primary focus is lending to corporates; the construction sector accounts for the biggest single share of its loan portfolio at nearly 24%.
Cuscatlán has the edge in the retail sector. It is regarded as having the best network of ATMs and a more sophisticated portfolio of consumer products than its domestic rivals. It has also demonstrated its willingness to embrace innovative ideas by becoming the first Salvadoran bank to issue a bond securitized by remittances sent home by migrant workers in the US. The $50 million five-year deal, arranged by Daiwa Securities, was launched in the domestic US market in April 1998.
Cuscatlán and Agrícola are both attempting to develop regional strategies. Cuscatlán has made the most aggressive moves into neighbouring countries so far, having bought banks in Costa Rica and Guatemala. Agrícola, for its part, has focused on the region’s two smallest economies, with investments in Honduras and Nicaragua.
The largest foreign bank in El Salvador by far is Citigroup, which claims to have between 6% and 8% of the wholesale market. It is also the leading player in derivatives and has a strong position in corporate finance and capital markets. Citibank is mandated to lead-manage the country’s forthcoming $200 million Eurobond issue which has long been delayed by the emerging-markets crisis.
A new entrant to the Salvadoran market is Scotiabank, which last year bought a medium-sized local bank, Ahorromet. The bank has been re-branded as Scotiabank Ahorromet, and the Canadian bank is now working to bring this operation up to international standard.
Guatemala
Best bank: Banex
Best foreign bank: Lloyds
Guatemala’s banking sector is weak and all the banks have suffered in the past 12 months. The collapse of a number of coffee export companies in late 1998 badly dented the balance sheet of several local banks. Others were hit by the crisis in emerging markets, having bought paper from other emerging-market countries – one bank even invested in now defaulted Russian GKOs – during a period of excess liquidity in early 1997.
The country’s banks are also very unwilling to disclose information on the quality of their assets. The bank which stands out for its transparency and its willingness to address problems head on is Banco de la Exportación (Banex). Like all the country’s banks, it suffered from the collapse of the coffee export companies, but it responded with a capital increase, which has made it Guatemala’s best capitalized bank. It has also put plans for international expansion on hold to avoid putting strain on its balance sheet. Unlike most other banks in the country, which withhold assets held by subsidiaries from their published accounts, Banex discloses all its lending activities on its balance sheet. Its primary strength is in trade finance but it has also built up a strong retail operation.
Another relatively strong bank is Banco de Occidente. It has expanded its lending aggressively in recent years but has been forced to shrink its balance sheet in the past year. It is an important player in the treasury market, in interbank placements and in export financing.
There are only two foreign banks with a full banking licence in Guatemala, Citigroup and Lloyds, and they are well matched in terms of the size and quality of their operations. Citigroup is a strong player in foreign exchange and in investment banking. It has advised the government on recent large privatizations and has a strong franchise among multinationals.
Lloyds, however, has a slight edge over its rival. It has been present in the country for many decades and enjoys a powerful reputation among local clients. Its focus is on corporate business. MP
Mexico
Best bank: Banamex
Best foreign bank: Citigroup
When asked his opinion on the best consumer bank in Mexico, Patrick Boucher, bank analyst with Santander Investment, replies: “Mexican banks haven’t made a consumer loan in a year. The banks are just not lending.” Falls in interest rates have not eased the situation and the banks’ lack of activity is interpreted by some as an implicit protest against Mexico’s ineffective bankruptcy laws that make lending a highly risky business. These are the kinds of challenges facing Mexican banks as they recover from their near collapse following the 1995 peso crisis.
Last year Euromoney did not give an award in Mexico because the situation was still too delicate. This year, with the resolution of the problems surrounding Fobaproa – the vehicle used to bail out the banks – and recapitalization, things look a bit better.
Banamex is the largest Mexican bank with assets of Ps300 billion ($31.5 billion) and is one of a handful of Mexican banks that foreign banks like to deal with for trade finance and credit lines. Its net income last year was Ps5 billion compared with Ps819 million for Bancomer which is similar in size. Its efficiency ratio was 69.5% and return on assets 1.52%, which, while not particularly impressive by international standards, is good by those of Mexico. BC
Panama
Best bank: Banco General
Highly commended: Banco del Istmo
Best foreign bank: Citigroup
Panama is a very different banking market from other countries in Latin America. Its liberal banking laws and low taxation have made it a leading offshore centre and well over 100 banks operate in the country. However, most of the business they carry out originates in other countries and is merely booked in Panama. Relatively few banks focus on the local market.
Of those that do, two local banks stand out. Banco General has a strong retail business and is one of the leaders in consumer mortgages. This is an important sector in Panama, which, because of its dollarized economy, is one of the few Latin American countries where customers can obtain mortgages for up to 30 years and for up to 95% of the value of their homes. Banco General also has a good position in corporate lending, counting most of Panama’s mid-size companies among its clients. It is widely regarded as a well-managed bank with a conservative strategy focused sharply on Panama’s domestic market.
Banco del Istmo is the other outstanding local bank. In strategy and style it could hardly be more different from Banco General. In recent years it has begun to pursue an aggressive strategy of expansion into neighbouring markets. In May it succeeded in buying Banex, one of the largest private banks in neighbouring Costa Rica. It is now attempting to buy an unrelated bank of the same name in Nicaragua.
Only a few foreign banks pursue local business. ABN Amro and BankBoston focus mainly on multinational companies. HSBC is a strong player in Panama’s free-trade zone.
The two most prominent foreign banks in Panama are Citigroup and Chase. Citigroup has both a retail operation – it is the leading player in credit cards and car loans – and a corporate banking business serving local businesses and multinationals. It is the market leader in guaranteeing letters of credit to users of the Panama Canal and counts the country’s biggest company, the Panama Canal Commission, among its clients.
The most active foreign bank in Panama in recent years has been Chase, which has expanded its share of the corporate lending market aggressively. Now, however, Chase is reported to be trying to sell its Panamanian operation, with the buyer likely to be a local bank. If that happens, Citigroup can expect to benefit. In a country with no lender of last resort, financial strength is an important consideration for customers. Those who choose to bank with Chase because of its international scope may switch their business to other foreign banks such as Citi. MP
Paraguay
Best bank: Citigroup
Citigroup Paraguay is the largest bank in the country with an 18% share of total deposits even though it has only nine branches. But a measure of Citigroup’s efficiency is that its nearest contender, state-owned Banco Nacional de Fomento, has a smaller market share with more than 40 branches. In terms of share of profits, Citibank’s presence is even more impressive. It currently has a 26.5% share and this is likely to grow to as much as 40% as, in the present troubled environment, other banks’ earnings are hit.
Paraguay is feeling the backwash of economic problems in Brazil and Argentina. With the fall in the value of the Brazilian real, imports are flooding into the country while Paraguayan exports, of which Brazil and Argentina take 50%, are being priced out of the market. Paraguay has a large informal economy, about 50% of the total, which explains why Citigroup can take a leading share of the market with so few branches. The bank hopes that non-performing loans will be kept at 5% throughout the difficulties. The troubles are not preventing expansion – the opening of another three branches and doubling of the number of ATMs is planned. The bank has been in Paraguay since September 1958 and has always focused almost exclusively on corporate banking. Five years ago there was a strategic rethink which pushed the bank in a consumer direction with mortgage and car-loan products. The total number of banks in Paraguay has reduced by about 12 from 36 to 24 following the introduction of tougher legislation and regulations in 1996
Peru
Best bank: Banco de Crédito del Perú
Best foreign bank: Citigroup
Banco de Crédito del Perú remains in a class of its own in Peru. Some years back bank provisioning rules were changed so that banks could not simply set collateral against loan losses but had to provide cash. As a result many Peruvian banks, but not Banco de Crédito, found themselves undercapitalized. The bank is conservatively run and has a commanding market share – 30% of deposits.
But Banco de Crédito may face increasingly strong competition. The purchase by Banco de Lima Sudameris of 53% of Banco Wiese consolidates this bank’s position as Peru’s second largest bank and should bring about much needed changes.
Venezuela
Best bank: Banco Mercantil
Best foreign bank: Citigroup
Mercantil is Venezuela’s second largest bank but has the best delivery mechanisms and has been expanding aggressively over the past two years. It has a 13% market share and 270 branches. Early this year it merged with its subsidiaries Banco de Inversión Mercantil, BH Mercantil, Arrendadora Mercantil and Fondo Mercantil. Venezuela’s banking market continues to undergo consolidation and further mergers cannot be ruled out.
Among foreign banks Citigroup has been in Venezuela for 82 years and has the largest share of assets – 2.7% compared with less than 1% for ABN Amro, ING, Standard Chartered and Chase. Citigroup’s deals have included advising and being co-lead bond underwriter to Conoco and Maraven in connection with the financing of a $2.43 billion heavy oil extraction and upgrading project (Petrozuata).
Uruguay
Best bank: Banco Comercial
Best foreign bank: ABN Amro
Banco Comercial is one of Uruguay’s oldest banks and has had a chequered career. It came under state ownership after getting into trouble in the mid-1980s and was then re-privatized in the early 1990s. These days it is leading the race among banks to modernize and upgrade and has been heavily involved in Uruguay’s consumer business boom over the past three years. Banco Comercial has branches all over the country. BC
